TheFunded Founder Gives Startups Some Advice
Erick Schonfeld
40 comments »
The Next Web conference that I am moderating in Amsterdam just kicked off, and the first speaker was Adeo Ressi, the founder of TheFunded, the invite-only community for venture-funded CEOs to compare notes about building startups and bitch about VCs. (VCs are not allowed on the site, which inspired a mock site, the Unfunded, for them to bitch about entrepreneurs). I met him last night at a dinner for the keynote speakers (he’s the tall one in the photo). Ressi is a font of knowledge about the startup world.
Despite the broader economic rumblings, it’ s never been cheaper to start a company and there’s still a ton of venture money out there. In fact, Ressi told me that there is so much money out there for startups that VCs are now offering to partially buy out founders’ personal stakes to get deals. In effect, they are paying off the founders to pick them. Below is some of his advice for entrepreneurs from his presentation that he just finished onstage:
The only time your lawyers will be honest with you in the venture raising process is when you interview them. After that don’t trust anything they say because their motivation is to close the deal and get the fee.
Everyone needs to go and pitch a VC first and expect it to fail. That first pitch will suck no matter what. Bring a business partner who is silent. Have him or her watch the interaction. Every time the VC falls asleep or makes a derogatory statement, your partner writes that down, and you go and fix it.
All you need is a PowerPoint. Make it 20 minutes. Do not throw in detailed financial statements. You are basically throwing a giant hunk of steak into a lion’s den and rolling around in it. Numbers is their business. They will tear you apart.
VCs talk amongst themselves. Most entrepreneurs fall into the classic mistake of pitching serially. There is no such thing as confidentiality. Your materials will be seen by dozens of VCs the second you pitch. It gets worse, if a VC likes you, they will tell the other VCs that you suck. You want to hit as many funds as you can,. I recommend trying to hit 30 funds in two weeks. Typically, you will get one term sheet per 10 pitches.
I guarantee you your first term sheet will be bad. They will lowball you, then they will pressure you to sign it quickly. Hold off. Your goal now is to get the second or third term sheet. Without other offers there is no market.
VCs say we will co-invest. They are trying to share the offer. Tell them, “No. Why don’t you make me an offer? I will evaluate the offer separately.” Do not let them syndicate the deal or merge the term sheets.
There is no confidentiality. Everything you send out will be seen by your competitors.
Some good advice. If readers have more to add, please tell us in comments.
(Photo by Ernst-Jan).
Would love to be there. When is the next big conference comming up?
YouYap.com
great advice . Thanks. Business is business.
Wow, that is MY livingroom there!
@YouYap.com: Next Conference is on April 2 and 3, 2009.
@youtap April 2 and 3, 2009
Thanks Adeo for your interesting speech
Hey That is me on the back of that picture!
Eric, I was watching the live stream of his speech (which was great BTW); any chance you can get hold of a copy and share with the TC readers?
gr8 post !
Really good insights you gave here.
Thanks for sharing.
Okay, here is something to add:
- practice your presentation. Especially if you are a shy tech geek. Try to feel like an actor who has to play the role of a salesman. Exaggerate. Push yourself. Watch Steve Ballmer Videos on Youtube. Tell yourself, that your product/idea is great. Even if it feels silly in the beginning.
- always keep in mind: There is much more capital than good ideas. You don’t need this VC in particular. But they need you.
- if they are telling you, that your idea is okay, average, nice but too risky, too early, to late, etc.. AND try to stay in contact with you: they really love your idea.
- if they ask you to evaluate your company, pick a very high but not ridicilous number.
- “Do not throw in detailed financial statements. “: that’s right. Try not to use numbers at all, especially if you are making a contract. BUT: show concrete ways, how to make money with the idea. Tell them, that you want to be cashflow postive asap (even if that’s a lie). Give them the feeling, that you are not just an idealist and really care about earning money.
- Last but not least: if you have the chance, talk to someone entrepreneur you trust (NOT your lawyer), before you make a decision. Even if the person has no clue about internet.
I guess there is much more to add….
Was walking around in the hallway after the presentation, and got very upfront feedback from VC’s present here. They don’t necessarily agree with most of the things Adeo said, even if it sounded logical to entrepreneurs.
good advice. Surely in this day and age you don’t need a VC until you have product.
If you product is anygood surely VC’s will want a piece of the action.
Greetings from Amsterdam. And thank you pitchstorm.tv for arranging the wildcard to this conference for our startup http://www.myngle.com
Great to be there.
Egbert
Thanks for the great feedback on the talk! Always a pleasure to help start-ups on your birthday and get a positive reaction.
To clarify the “lawyer” point in the article, I am a firm believer in the strategy of “trust, but verify” when it comes to term sheet negotiations by counsel on your behalf. Entrepreneurs the world over should not assume that something in your legal documents is an “industry standard” just because that is the opinion of your counsel. Do your own research.
For example, TheFunded.com publishes term sheets from all around the world (available to Members), and there is nothing standard about the deals being offered in any respective industry, region, or stage. Terms are all over the map, and everything should be properly understood and negotiated by the entrepreneur before executing the documents.
I will post the deck and advice shortly… Stay tuned, and enjoy!
Some of you have taken my advice and visited http://www.pedatacenter.com which my company launched in late 2007. We pull regulatory filings of venture backed companies and analyze the terms off of those documents, and also calculate a valuation for that company. Arm yourself with market comparables before walking into a meeting. You can search an investor and look at some of the deals they have done and have physical evidence when walking to the negotiation table.
Thanks for sharing the advice Adeo and Erick!
Great notes. but i laughed out loud when i read the following
In fact, Ressi told me that there is so much money out there for startups that VCs are now offering to partially buy out founders’ personal stakes to get deals. In effect, they are paying off the founders to pick them.
They’re not paying off the founders to pick them.. wtf logic is that? if a founder has no or little stake in his OWN creation, how do you equate that to a positive turnaround? reminds me of one of the paypal guys. whats his name who got shafted with a .0001% or something?
obviously, talks like that are not a surprise coming out of a VC’s mouth.
i mean to say, the VC’s who do make that assertion, it’s not a surprise to hear from them. correction
I suspected as much after some of the stories around the web.
Harry “looking forward to the deck” Wang
There is no formula to getting funded. So its hard to generalize. For example, its important to have some financials in the pitch. It at least shows that you have thought about it even if it can be torn apart. Ultimately, its also about convincing someone about something that you believe in deeply. The idea about bringing in a business partner to attend and observe is an excellent one.
Some of the advice is good, but some of it misses a little bit:
“It gets worse, if a VC likes you, they will tell the other VCs that you suck.”
VC funds know that if they rely on their VC brethren for input without a grain of salt, they’re never going to get a winning deal in their lap. Plus, the VC business doesn’t work in a time vacuum. If a VC partner bad mouths a founder, but invests in them later, they tend to look either stupid and/or dishonest. Either way, their colleagues know.
“Do not throw in detailed financial statements.”
True, don’t use the accounting-esque type of statements, but you better have some key numbers, such as the size of the market.
The overall message is good, though.
>>VCs talk amongst themselves. Most entrepreneurs fall into the classic mistake of pitching serially. There is no such thing as confidentiality. Your materials will be seen by dozens of VCs the second you pitch. It gets worse, if a VC likes you, they will tell the other VCs that you suck. You want to hit as many funds as you can,. I recommend trying to hit 30 funds in two weeks. Typically, you will get one term sheet per 10 pitches. <<
um, i work with a lot of start-ups and I *highly* disagree with this ratio. 1 term sheet per 10 pitches? No company, unless super well connected or super hot, could EVER get 30 meetings in 2 weeks. Most would be lucky to get 1 per day and that would be really pushing it. Less than 1% of all companies who go seeking funding ever get it, so those two sentences are extremely misleading.
Venture business is like every other business. If people really like you they tell others you suck. Business psychology 101. God bless free speech. TechCrunch you REALLY suck. lol
On sharing slide decks: At my last company where I was CTO, 3 of our 4 investors sent me “confidential” decks of companies they were reviewing for my feedback. These were reputable VC’s. IMO it’s not really good, but it’s not worth freaking out about either. The decks generally get shared to help them evaluate the company, not to steal ideas from them which is what new entrepreneurs usually get stressed about. There’s probably been some cases of stealing ideas, but it’s extremely rare.
Since Erick provided a brief summary of a longer talk, some of the comments criticized a few points that should be clarified:
- Founder Liquidity (Faramarz): Many entrepreneurs are posting and discussing that they are selling a portion (not all) of their common equity position to venture funds in a transaction to take hundreds of thousands or millions of dollars individually. This incentive, which you can see in the term sheets on the site, has been offered in both early and late stage rounds. It is discussed as a tactic by VCs to win deals in competitive situations.
- Sharing Financials (jro): The likelihood of VCs treating your financials in a confidential manner increases with VC interest in a particular deal, which is extensively discussed on TheFunded.com. Many Members recommend sharing light financial in the introductory meetings and then only sharing detailed historical data and working models in later diligence, potentially after a term sheet is signed. There are numerous complaints by Members who have received materials of competitors or have seen their own materials used in pitches by related companies.
- 30 Meetings in 2 Weeks (antje wilsch): This refers to introductory calls when initiating a formal fundraising. Many inexperienced entrepreneurs pitch a few VCs per month for four to six months, word gets around about the deal, and Members complain that it becomes difficult to secure new meetings as a VC has already heard about the opportunity. Some of the more experienced Members have created online information rooms and a much more consolidated process, pitching all of their target venture partners in less than a month and having all of the material ready for the firms to make decisions. While 30 meetings is an aggressive target, a large number of Members claim to have to meet with in excess of 30 funds and as many as 60 funds before receiving terms. On the other hand, some entrepreneurs get terms in less than 5 meetings. From feedback on the site, it would appear that 30 funds is a middle target to pitch with the goal of receiving multiple competitive offers.
Hope that this helps to clarify some of the points. In general, the goal of the talk is to provide a synopsis of views expressed by the Members after reading approximately 10,000 posts, extensive discussion, and nearly 100 added term sheets over the last 45 days.
The slides have been posted now:
http://www.thefunded.com/funds/item/3208
All VCs think they are smart; the vast majority of them aren’t. (85% of fund managers can’t beat the S&P 500; yet they have jobs. Same with VCs. ) Use the dumb ones for practice. Practice your pitch infront of the medicore VCs that have funded crappy me-too companies.
In my experience, most VCs have accomplished very little in life - other than going to an Ivy league school. Think of them as spectators handing out other peoples money. Make them feel like they are making a smart investment by supporting your plan with tangential facts from legimate sources. If done cleverly enough, you can convince people of just about anything, including “smart” VCs.
You want to control the conversation; don’t give out any handouts during your presentation.
Borrow impressive resumes. Informal advisors with impressive resumes will make the funds flow.
Avoid answering questions directly; it only gets you in trouble.
Watch American Greed on CNBC. Study how con men pitch scams. Some of the greatest con men have raised incredible amounts of money. If you can’t raise $150 million for a bank that doesn’t exist, get a job.)
@Adeo fair enough, but the truth still remains that most companies who seek funding don’t get it through VC channels at the end of the day. I see a lot of companies who read about funding and think that money is just hanging off trees for them to come and plop down some inane idea and get millions. It’s not like that at all. Raising money is hard work, a lot of effort, and quite often fruitless.
If one could get 30 meetings in 30 days, which is highly unlikely, let’s say even in 60 days, it’s also 60 days of not running your company, not focusing on it, and being on an emotional rollercoaster. It can be draining.
Most entrepreneurs who seek funding aren’t doing it the 2nd time around (and those from previously successful companies don’t have to make the rounds anyway) so they don’t have the luxury of seeking investment purely for fun. They are *relying* on getting money, and this IMHO is a shotsighted plan. Most companies who seek money don’t get it from VCs.
Thanks for the reply Adeo! what you’re doing is very much appreciated, but i think you know this already
This stuff is gold-plated. Adeo calls them like he sees it, and there’s something to be said for straight-shooting, hard-talking advice from someone who knows. Thanks, Erick.
@antje Reminds me of the saying “banks don’t lend money to people who need it”. Especially in this day of web startups I would imagine that it would be far easier to get funded if you showed some cash flow. The funding would then come in because you really need to expand fairly quickly via people (developers probably) and/or hardware.
@webmogul, there are several early stage investment firms, but they’re limited, and they probably get the most inundated. Fred Wilson just wrote that companies with no revenue but lots of users will survive if they don’t spend money… lol
Great post and helpful comments! Should think about VC 2.0
What are VCs investing on these days on the Hardware side?
Back in 2001 I tried to launch a start-up based on a I/O technology that would have beaten anything available then AND today but what I heard is that a technology was too far from the customers.
VCs, back then, were investing in boxes that attached to networks and did something. The attractiveness of those companies were that they made a product that the end customer would be purchasing.
If you have a technology, you need to put it into a core, then the core into a chip, then the chip on a board and the board in a box. Right now cores are selling well for my company, so customers are needing cores, but would an IP creation company be fund-able?
RAUL
I had an analyst from a tippy-top Silicon Valley VC call me to ask if I was looking for funding. I was very happy to hear from the fund… but surprised that they had contacted me because they had already invested in two companies that are clearly in our space. Even after mentioning that I saw a conflict, the analyst insisted that I send our materials. After 48 hours he called me and said… “he now agreed, we are too close to the two of their portfolio companies”… the two companies that I had mentioned prior to sending our materials.
He promised that he would immediately delete our materials and not share them… but I guess I can be assured that our plans ended up in the hands of those companies. I hope they have more integrity than that. What do you think?
there’s a lot of paranoia here, and some of its pretty misleading
yeah vcs talk a bit, but not about sensitive stuff. and none of the ones i work with t send plans around. that would be wrong. and anyway we’d get a seriously bad reputation seriously fast.
it happened once last year when someone junior sent out a plan by mistake to someone externally. we screwed up. we apologized.
if we talk at all, we usually talk about a founders’ reputation — are they as good as they claim to be? — not really about the concept (which is usually less than 10% of the value in any case), and rarely when it’s a live deal — for obvious competitive reasons. you’d be astonished how derivative most of the ideas we see are. ideas are cheap. the tough stuff is execution.
good vcs build their reputation on being discrete about what they see. don’t pitch to any other kind.
talk to seasoned entrepeneurs about the guys who backed them. were they schmucks? did they add value? were they discrete?
one thing is true: get a good lawyer. a really good one, who’s done exactly this ten times before. otherwise you’re educating them, and they’ll waste a lot of your and your investors’ time, goodwill and money. oh, and it reflects badly on you because it makes your investor think: huh, this guy can’t tell the difference between a good lawyer and a bad lawyer; wonder if he can tell the diff between a good employee and a bad employee?
I can only recommend downloading the slides from Adeo’s link and keeping them in mind throughout the process.